Money Matters: Is your savings ratio in red zone?

Last week, we started a series on personal financial ratios. Like companies, individuals too need to maintain certain finance ratios to ensure good financial health. As part of the series, so far we have discussed debt service ratio , basic liquidity ratio and leverage ratio . Today, we discuss savings ratio.

Culturally, Indians are known to be savers unlike Westerners who spend on credit. Of course, times have changed. Affluenturban Indians are not really shy of credit any more. Still by and large we remain a savers’ country. Take for instance, as per the Reserve Bank of India’s annual report, 2011-12 the domestic household savings was Rs 17,493 billion in 2010-11 compared with Rs 16,390 billion in 2009-10. (See report here)

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Understanding your savings ratio is important. So what is a savings ratio? Simply put, this figure tells you whether you are saving enough for your future. So it is a proportion of income you set aside as savings and is expressed in percentage terms.

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Example: To get the savings ratio, you will need to divide your savings per month by your net income per month.So, if you are saving Rs 20,000 a month and your income is Rs 1 lakh per month, your savings ratio is Rs 20,000 divided by Rs 100,000, which comes to 20 percent. This means you manage to save 20 percent of your income.

Are you in the red zone?

Ideally you should have a minimum ratio of 10 percent. For those who are starting out in their career and have relatively a lower pay, ensure you meet the minimum ratio, without fail. By the time you settle down in your career, get married, buy a house and have a kid or two, you pretty much reach the mid to late 30s. In such a situation, a ratio of 10 percent is very important and must ensure that you maintain it.

By the time, you reach mid-40s, the salary would substantially increase. Accordingly, your savings ratio should increase by up to 25 percent. By 50, when the kids have left home and are fairly financially independent, you must ensure a larger savings ratio, ideally of 30 percent or more.

By this time, most of your loans would have been paid off and you might have surplus to save. As a thumb rule, remember a savings ratio of less than 5 percent means you are in the red zone.

Keep tracking this space as we bring more personal finance ratios, to let your know the status of your financial health.